Exchange Flows During Liquidity Contraction
Exchange flows are often treated as directional price signals. They are not.
They are better understood as reflections of liquidity conditions and risk posture.
During periods of expanding liquidity, exchange inflows and outflows tend to be interpreted aggressively. Assets moving onto exchanges are assumed to signal imminent selling. Assets leaving exchanges are framed as long-term accumulation.
During liquidity contraction, these assumptions break down.
As liquidity tightens, participants prioritize optionality and access over positioning. Assets move toward venues where liquidity exists, not necessarily where selling intent is highest.
Exchange inflows during these periods often reflect:
– a need for immediate liquidity
– collateral repositioning
– risk management behavior
– forced activity rather than voluntary positioning
Outflows, conversely, may reflect reduced market depth rather than conviction.
The mistake is treating flows as intent rather than constraint.
Liquidity conditions determine how flows should be interpreted. Without that context, flow data is descriptive at best and misleading at worst.
Flows do not predict outcomes.
They describe the state of the system.
